The regulatory environment for U.S.-based marijuana-related operations remains uncertain. At present, marijuana-related activities that are legal under U.S. state law remain illegal under U.S. federal law. Issuers in Canada connected to U.S. marijuana operations remain unsure of their disclosure obligations to Canadian investors and have sought clarification on what constitutes appropriate and timely disclosure. Recently, in the face of this uncertainty, the Canadian Securities Administrators (“CSA”), an umbrella organization of provincial and territorial securities regulators, has provided some much needed guidance.
On October 16, 2017, the CSA published Staff Notice 51-352[1], which outlines disclosure expectations for issuers that presently have — or are engaged in developing — marijuana-related activities within U.S. states that have authorized such activity (“U.S. Marijuana Issuers”). In addition to outlining its general disclosure expectations, the CSA provided specific disclosure requirements that apply depending on how U.S. Marijuana Issuers conduct operations or are otherwise involved in the U.S. marijuana industry.
All U.S. Marijuana Issuers
For the CSA, U.S. Marijuana Issuers must describe the nature of their involvement in the U.S. marijuana industry and explain that marijuana remains illegal under U.S. federal law. In addition, all U.S. Marijuana Issuers must state that the federal government’s forbearance of enforcement is subject to change, and must disclose the resultant risks, including the risk of adverse enforcement action. Further, U.S. Marijuana Issuers must state whether and how its marijuana activities are consistent with any U.S. federal enforcement priorities. The CSA also expects all issuers to identify financing options available to them in support of continuing operations, and detail their ability to access public and private capital.
U.S. Marijuana Issuers must also include at least one of three types of disclosures, each of which relates to an issuer’s industry involvement – direct, indirect, or ancillary.
Issuers with Direct Involvement
Direct industry involvement arises when an issuer (or a subsidiary that it controls) is involved in cultivating or distributing marijuana under a U.S. state license.[2]
Issuers with direct involvement must both detail and confirm how they comply with licensing and regulatory requirements enacted by the applicable U.S. state. These issuers must provide specifics of their program and procedures for monitoring compliance with U.S. state law on an ongoing basis, and disclose facts surrounding any material non-compliance, material citations, or notices of violation.
Issuers with Indirect as well as Ancillary Involvement
Indirect industry involvement refers to instances where an issuer has a non-controlling investment in an entity that otherwise has direct involvement in the U.S. marijuana industry.[3]
U.S. Marijuana Issuers with indirect industry involvement must detail the regulations that apply in the U.S. states in which their investee(s) operate, and provide reasonable assurance that the investee’s business complies with applicable licensing and regulatory requirements within the relevant U.S. states. U.S. Marijuana Issuers with ancillary industry involvement are also required to provide a form of assurance similar to the latter.
In short, CSA Staff Notice 51-352 provides much-needed guidance on disclosure obligations. Through its Staff Notice, CSA Staff has provided U.S. Marijuana Issuers with disclosure benchmarks directed at assisting investors make sound investment decisions in light of the shifting U.S. regulatory environment. CSA Staff expect U.S. Marijuana Issuers to always remain sensitive of their obligation to evaluate, monitor, and reassess risks on an ongoing basis in order to supplement, amend prior disclosures, and communicate material changes to investors.
The author would like to thank Blanchart Arun, Student-At-Law, for his contribution to this article.
[1]Canadian Securities Administrator (CSA), “CSA Staff Notice 51-352: Issuers with U.S. Marijuana-Related Activities” <http://www.osc.gov.on.ca/documents/en/Securities-Category5/csa_20171016_51-352_marijuana-related-activities.pdf>.
[2] Ibid.
[3] Ibid.